Macy’s: Reported Buyout Offer Is Worth Considering

Key Morningstar Metrics for Macy’s

• Fair Value Estimate: $25.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

On Dec. 10, The Wall Street Journal reported that Macy’s M had received a buyout offer of $21 per share (equity value of just under $6 billion) from Arkhouse Management and Brigade Capital Management. While this offer is below our unchanged fair value estimate of $25 per share, it is a premium to recent mid-teens share prices. Moreover, the report states that Brigade, a hedge fund with a history of investments in retail, and Arkhouse, a real estate investor, may be willing to raise their bid after due diligence.

Given this possibility, Macy’s significant liabilities (including $3 billion in long-term debt), and our view that the firm does not have a competitive advantage, we believe it would behoove the firm for this acquisition to move forward. Supporting this is the poor performance of fellow no-moat department store Kohl’s KSS stock since its acquisition process collapsed in early 2022.

The bid comes at a busy time for Macy’s, amid the critical holiday shopping season and just weeks before the long-planned CEO transition to Tony Spring from Jeff Gennette. Although traditional mall-based department stores are very challenged, Macy’s has strengths that might attract bidders, including its more than 40 million loyalty members, a large base of credit card holders, and e-commerce sales estimated at more than $7 billion this year by eMarketer.

The buyout group is undoubtedly interested in Macy’s large real estate portfolio, which has attracted activists and potential buyers in the past. However, the value of this real estate cannot be firmly established, and the company’s efforts to monetize it have generated limited value for shareholders thus far. Macy’s has been willing to return capital to shareholders through dividends and share repurchases and generates significant free cash flow, but it also has significant debt and capital expenditure needs.